Photo: MANAN VATSYAYANA/AFP via Getty Images

Critical Questions by William Alan Reinsch, Lydia Murray, and Jack Caporal
Published December 3, 2019

The Regional Comprehensive Economic Partnership (RCEP) is reaching its final

stages, with officials aiming to sign the agreement in February or March 2020.
RCEP, which has been in the works since 2012, would be the world’s largest trade
agreement by population and GDP. A study from the Brookings Institution suggests
that RCEP has the potential to grow the global real incomes by $285 billion annually
if put into place before 2030, which in absolute gains is twice that of the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
The deal makes significant strides on rules of origin, intellectual property, and tariff
reduction, while falling short in other areas like e-commerce. Nonetheless, RCEP
represents a significant achievement for free trade in the Asia-Pacific.

Q1: What is RCEP and where do negotiations stand?

an agreement coming to fruition. However, unlike previous instances, in early
November, leaders from RCEP countries declared that text-based negotiations and
“essentially all market access issues” had been concluded and that a legal scrub of
the agreement would be undertaken to prepare for signature in 2020. A legal scrub
is traditionally the last box to check before an agreement is signed. That leaders
have ordered this final step suggests signature is more likely than not in coming
months. RCEP negotiations had reached a critical point for the Asian economy as
slowing global trade, increasing Asian integration, and disruption of trade patterns
all put pressure on RCEP nations to come to an agreement.

During the final negotiations, Indian prime minister Narendra Modi announced
that India would pull out of the agreement. While India’s move was somewhat
unexpected, the departure will not impact the progress of RCEP. The remaining 15
nations plan to move forward, aiming to sign the agreement in 2020 and
implement it in 2021. The RCEP provisions that specifically address India will be
frozen, and other small changes may be made in order to account for India’s
departure. RCEP will remain open for India to rejoin at any time (RCEP also
contains a more general accession provision), but it is unlikely that India will look
to rejoin prior to the signing of the agreement.

Q2: Why did India leave the trade pact?

A2: Prime Minister Modi stated that India’s withdrawal was the result of “core
concerns” with RCEP, and Indian minister of external affairs Subrahmanyam
Jaishankar said that no agreement was better than a bad agreement. India’s main
concerns with the agreement revolved around e-commerce sections and trade
significantly decrease its tariff and non-tariff barriers, which currently cover up 90
percent of imports depending on country of origin, if it were to proceed with
joining RCEP.

Prime Minister Modi also faced opposition from the public and business
community in India regarding RCEP. Industries raised concerns about the ability to
compete with cheaper exports (mainly from China), and both the prime minister’s
political party and the opposition party pushed for him to withdraw from the
agreement.

Q3: What does RCEP cover, and how does it compare to other regional
agreements?

A3: While some have criticized RCEP for not covering as much or breaking down as
many barriers as the CPTPP, RCEP provides tariff reductions, although some
market access issues still need to be hammered out. The agreement provides a
framework for future negotiations and changes. RCEP spans 20 chapters,
compared to the CPTPP’s 30 chapters and the 34 chapters in the United States-
Mexico-Canada Agreement (USMCA). In addition to lacking breadth compared to
the CPTPP and the USMCA, RCEP is also expected to lack the depth of those
agreements. The exact tariff schedules will not be known until the agreement is
signed in 2020 and are expected to be unambitious compared to the other
agreements. Most members are expected to reduce tariffs on only 80 percent of
tariff lines (although with India’s withdrawal that number may increase to 90-93
percent) and maintain carveouts for agricultural products. By contrast, the CPTPP
once fully implemented would reduce tariffs to zero on 99 percent of tariff lines.
RCEP also includes limited provisions on services, investment, and standards. In
each of these areas, the rules are relatively weak. RCEP members used a mix of
positive and negative lists for services, with CPTPP members opting for the more
ambitious latter format. The section on intellectual property was stronger than
expected, and the digital copyright rules go beyond what was included in the
CPTPP. The agreement does not include labor or environmental chapters. RCEP
contains an investor-state dispute settlement provision, but it will not be
operational unless members decide to activate it in three years when they revisit
the provision. RCEP also includes a competition chapter; however, unlike the
CPTPP, it does not include disciplines on state-owned enterprises.

One of the main points of conflict in negotiations revolved around e-commerce,

and the resulting sections on it were lackluster in content. E-commerce and digital
trade are of increasing importance in Asia as it already leads in many indicators of
global readiness, such as mobile phone use and online shopping. Many hoped
RCEP would include provisions that would decrease barriers for e-commerce and
create coherent rules throughout the region. However, the agreement fails to
include prohibitions on data localization or barriers to cross-border data flows.
Proponents hoped RCEP would emulate the CPTPP and the USMCA to prevent
individual countries from restricting the movement of information across borders,
which is a key way for businesses to not only reach customers abroad but
coordinate activity across countries. Unlike the CPTPP and the USMCA, RCEP also
does not include a customs duty prohibition on electronic transmissions, which
would have prevented countries from imposing customs duties on digitally
delivered products. The inability to agree on a customs moratorium sends a
among group members as it stands to gain economically and in influence. RCEP is
important to China because of declining U.S.-China commercial activity and its
maturing economy. Due to rising domestic labor costs, China is eager to find duty-
free imports from RCEP partners to replace imports from the United States that are
subject to tariffs imposed in response to U.S. duties. Liberalized access to
developing markets also gives its domestic businesses more certainty that they will
not have to rely solely on internal consumer demand. Also, China likely hopes that
increased exchange in high-tech know-how with South Korea and Japan will keep it
on its path to climb up the value-added chain as articulated in the Made in China
2025 policy directive.

Despite concerns about China, some U.S. companies could take advantage of RCEP
if they have preexisting Asia operations or are planning on expanding to the region.
Particularly, the tariff reduction and other benefits, including common rules of
origin, for RCEP nations are applied based on manufacturing location, not the
headquarters of a company, so a U.S. firm that produces in an RCEP nation can
export to other RCEP nations and receive the same benefits.

On the other hand, the U.S. government now finds itself in a situation where it is
not a party to either of the two major trade agreements in the region (RCEP and the
CPTPP). Both agreements will encourage the development of supply chains inside
their regions, which will leave U.S. companies at a disadvantage unless they are
located there. The U.S. absence from the agreements also encourages both groups
of members to look elsewhere for regional leadership—to China in the case of RCEP
and Japan in the case of the CPTPP. Over the long term this will work to the United
States’ disadvantage in geopolitical as well as economic terms.